Today I am going to attempt a deep dive into one of my important holdings– Brookfield Corporation (ticker:BN).

One of my core investment principles is to obtain part-ownership in businesses that are simple to understand. Brookfield Corporation from the outset is anything but simple to understand. Yet I own it. In this article, I will attempt to shed some light on Brookfield Corporation, a very attractive investment opportunity that at the price it is trading, I simply could not pass along!

Highlights

1. Run by a charismatic CEO, Bruce Flatt, who’s been at the helm of the firm since 2002
2. Asset Manager with skin in the game
3. Exclusive focus on alternative assets investments
4. Majority stake in Oaktree Capital Group LLC, which was co-founded by legendary distressed debt investor, Howard Mark
5. One of the most under-rated and under-the-radar  mega-cap and misunderstood publicly traded companies in the world

Background

In December of 2022 Brookfield Asset Management, which traded under Ticker: BAM split itself into a holding company, Brookfield Corporation (traded under ticker BN), and a pure-play asset management firm, (with the same ticker BAM), whose revenue model is through profits from assets it manages for outside investors.

2022 investor presentation slides offer insights into why management made the above move, the basic idea being to unlock the value residing in the asset management arm of the business and their view on the potential for AUM growth. BAM by being asset light entity can distribute its profits to shareholders in the form of dividends. The majority stack holder of BAM is BN at 75 % and they stand to benefit from the generous dividend payout.

Prior to the above-mentioned split of the asset manager,  Brookfield spun out 4 parts of its business into stand-alone entities:

• Infrastructure business- BIP (owner and operator of their utilities, transport, midstream, and data businesses),

• Renewables business- BEP (renewable power generation and transmission, and global energy transition),

• Business Partners- BBU (services and business such as mortgage lending/insuring, government lottery service providers, basically most things that don’t fall under their other businesses),

• Insurance and Reinsurance- BNRE (life, health, personal, casualty, & property insurance & reinsurance- basically insurance for other insurance companies– transferring some of the risks of catastrophic circumstances requiring huge payouts by the originating insurer).

What follows is my description of the original entity, now called Brookfield Corporation, and is now trading under the ticker symbol BN. In addition to the 75 % economic interest in the manager (BAM), Brookfield also has the following percent economic interest in the remainder of its spin-offs: a 27% stake in Infrastructure, 48% in Renewables, 65% in Business Partners. The insurance entity exists only in corporate form.

Brookfield started out (founded in 1899) in Brazil, operating and managing electricity and transport infrastructure in Brazil. It was incorporated in Toronto as a public company in 1912 under the name of Brazilian Traction, Light and Power Company. The company changed its name to Brascan (a portmanteau of Brazil and Canada) in 1969. In the 1970s the firm began selling its Brazilian interests and began investing heavily in industries such as real estate, timber, and mining.

Brascan was acquired in 1979 by Edper an investment holding company started by brothers Peter and Edward Bronfman, with the money they inherited from the family’s Seagram’s spirit fortune.

Mr Jack Cockwell, the legendary CEO of Brascan, who was initially hired by Edward and Peter Bronfman to run their investments in 1968, was the key architect of turning around the modest investment holding company into one of the world’s largest conglomerates by snaring undervalued companies.

During the 1980s, through an intricate web of cross-ownerships, the Brascan group controlled a diverse number of companies in diverse sectors, including oil, mining beer, real estate, forest products, and power companies.

The Canadian recession of the early 1990s turned out to be a difficult time for the Brascan group as the sprawling empire built by Mr. Cockwell came tumbling down. He was forced to liquidate several of the group’s priced assets and Mr. Cockwell was forced to sell prized holdings such as  John Labatt Ltd., Royal Trustco Ltd., London Life Insurance Co., Trizec Corp. Ltd., and MacMillan Bloedel Ltd.

In 2002, Mr. Cockwell put Bruce Flatt in charge of the company. He began to shed the firm’s cyclical resource assets and focused the company into three core areas, real estate, power, and fund management. The firm changed its name to Brookfield asset management in 2005, in part, to shed its past history as a  conglomerate to pick up on its more visible retail image of the company’s real estate subsidiary.

What we see of Brookfield today is in large part the result of Bruce Flatt’s leadership and vision. His imprints on Brookfield, resulting in the holding company that is BN today can be summarized as follows:

1. Change in business model from a pure play infrastructure company into an asset management company that seeks out investors to invest alongside in infrastructure and related projects
2. Focus on purchasing undervalued assets in distress, improve efficiency and turn around and sell in public markets at opportune times.

3. Streamline the assets that are owned and managed by Brookfield into ones that are critical to their industry and serve as a provider of consistent, stable, and recurring/perpetual cash flows.

Skin in the Game- Ownership Structure

Brookfield has two classes of shares. Class A shares are traded in public markets. Ownership of these shares gives the owner the right to vote for half of the board of directors. Class B shares are fully owned by partners, who are the stewards of class B shares. Partners commit to investing a substantial portion of their net worth in class A shares as well.  I do want to note though that the ownership of class B shares by Brookfield partners is through a company called Partners Ltd., which is governed by entity called “BAM Partnership”.

To further reinforce the long-term stability in ownership of Brookfield Asset Management’s class B shares, a group of longstanding senior leaders of the “BAM partnership”, Jack Cockwell, Bruce Flatt, and four other top executives, have been designated to oversee stewardship of the class B Shares.

What does Brookfield Do?

Brookfield invests almost exclusively in ‘Real’ or ‘alternative’ assets: assets outside traditional, liquid assets like equities, bonds, and cash. They are a leading global alternative asset manager with over $750 billion of assets under management across renewable power & transition, infrastructure, private equity, real estate, and credit. Owning and operating these sorts of assets are Brookfield’s bread and butter- which is a desirable avenue for mega money clients who will pay a recurring fee to Brookfield to manage the assets at a target rate of return.

Another important source of income for Brookfield is carried interest, which is when profits produced by owning and operating the alternative assets are in excess of the agreed-upon rate of returns for their clients. Essentially, when Brookfield makes too much money for their clients, they get to skim off the top as well as the fees they charge.

Brookfield solicits investments from clients from time to time with a specific investment goal and a target dollar amount. A recent example is its Global Transition Fund, which raised a record $15 Billion dollars. It is the world’s largest private fund dedicated to the net zero transition. The goal of the fund is to purchase existing non-renewable assets, retire them, and replace them with renewables. Assets like a coal-fired plant being shut down and replaced with wind or solar for energy generation.

In addition to raising the allocated capital from investors for ventures such as the Global Transition Fund, Brookfield may also invest some of their own capital – revolving credit facilities, debt, and/or cash – to be a part owner with their clients. This creates the dynamics of skin in the game– so they have an additional incentive in the success of the fund and the assets owned by the fund.

An example of such incentive-driven activity in assets under management is their sale of Westinghouse– a nuclear reactor producer– which they bought out of bankruptcy in 2018. In Oct 2022, agreed to sell Westinghouse for a total enterprise value of $8 Billion, with expected proceeds equalling ~6 times the invested capital for an IRR of 60 % and a total profit of 4.5 Billion.

Brookfield has the freedom to pay out these kinds of profits to its investor clients or recycle them into new funding rounds.

Spin-offs – and Valuation

 As noted earlier Brookfield has spun out several of its asset management businesses into separate entities- BIP, BEP, and  BBU are limited partnership vehicles domiciled in Bermuda. Brookfield Corp. varying economic stakes in these LPs, and it acts as a service provider– offering management, administrative and advisory services to these LPs for a fee. Essentially, Brookfield is still responsible for the day-to-day operation of these companies, though officially they are stand-alone independent entities. In short, the Corporation can manage these subsidiaries in any way it wants.

Let us summarize the various stake that the mothership has in its spinoffs. As of this writing, BNs stake in the newly created asset manager, BAM is the largest at ~38 B. Its stake in BEP and BIP are currently valued at ~9 B and ~7 B respectively. BNs ownership of the private equity business stands at ~3 B. In addition, BN has 100 % ownership in its real-estate daughter, BPY, which was publicly traded until a couple of years back. At the end of 2021, this business was valued at ~32 B. However, with the market correction in real estate, we can assume this number to have reduced by 15-20 %, when BN reports them in their 2022 annual letter. And finally, there is Brookfield insurance business, and the carry it owns in the funds that are managed in the asset manager.  Discounting for the ~12 B of corporate borrowing debt, the total assets on the books for BN are ~85B. It is worth noting that most of the corporate debt is fixed-rate long-duration debt and as such is not impacted by rising interest rates. BN has ~1.6 B shares outstanding,  producing a per-share value of $53.

Summary.

In essence, Brookfield sole purpose as an operating entity is to make themselves and their client’s boatloads of money by focusing on investments and part-ownership in essential real assets in specific industries so as to provide stable and perpetual cash flows. It is a complex company but not necessarily a complicated business. It is trading at ~$35 and a conservative estimate for the stock per share is $53. I fully expect markets to eventually realize this discount, though it may not happen tomorrow or a year from now! However, I am in this game for the long haul and am happy to go along the ride with a prudent manager, Bruce Flatt at the helm of this one-of-a-kind mothership.